Landlord Tax Changes – Restriction on Mortgage Interest Relief

Landlord – interest relief restriction: deduction v tax reduction In his July 2015 Budget, the Chancellor dealt a blow to landlords with his announcement that from April 2017 relief for finance costs would be progressively restricted. In giving effect to the restriction, landlords would move from the current position where they are able to deduct finance costs, such as mortgage interest, in full when computing their rental profits, to one where relief is given as a basic rate tax reduction. Phased in The switch from deduction to interest rate reduction is to be phased in over four years, with a gradual shift away from deducting property finance costs from property income. Tax year % finance cost relievable by deduction % finance costs given as basic rate tax reduction 2017/18 75% 25% 2018/19 50% 50% 2019/20 25% 75% 2020/21 onwards 0% 100%   Deduction v basic rate tax reduction Where relief is given by deduction, the landlord obtains tax relief at his marginal rate of tax. The property finance costs are deducted in arriving at the taxable profit and that profit is taxed at the landlord’s marginal rate of tax. By contrast, where relief is given as a tax reduction, the rental profit is first calculated without taking account of the finance costs relieved by tax deduction and the tax is worked out on those profits. Effect is given to the basic rate tax reduction by deducting an amount equal to the finance costs x the basic rate of tax from the tax figure initially computed on the profits. Example Ian is a landlord. In each year from 2016/17 to 2020/21 inclusive, he has property income of £30,000. He pays mortgage interest costs of £6000 and incurs other expenses of £2000. He also has a salary of £60,000 and pays tax on his property income at the higher rate of 40%. His tax position for each of the years is as follows: 2016/17 2017/18 2018/19 2019/20 2020/21 £ £ £ £ £ Property income 30,000 30,000 30,000 30,000 30,000 Expenses (2000) (2000) (2000) (2000) (2000) Deductible finance costs (6000) (4,500) (3,000) (1,500) nil Taxable profit 22,000 23,500 25,000 26,500 28,000 Tax on profit (@40%) 8,800 9,400 10,000 10,600 11,200 Tax reduction @ 20% 0 (300) (600) (900) (1200) Total tax 8,800 9,100 9,400 9,700 10,000   Summary 2016/17 2017/18 2018/19 2019/20 2020/21 £ £ £ £ £ Property income 30,000 30,000 30,000 30,000 30,000 Expenses (2000) (2000) (2000) (2000) (2000) Finance costs (6000) (6000) (6,000) (6,000) (6,000) Tax (8,800) (9,100) (9,400) (9,700) (10,000) Profit retained 13,200 12,900 12,600 12,300 12,000   As a result of the shift from relief by deduction for 100% of property finance costs to relief by basic rate reduction for 100% of finance costs, Ian’s retained profit is reduced by £1,200. Sting in the tail Moving from deduction to tax reduction has hidden costs. The relief is given later in the calculation, which has the effect of increasing the taxpayer’s taxable income. This may move him into […]

Poundland Pricing – can you apply the poundland principles to your business?

Poundland Pricing Can you apply the Poundland principles to your business? We can say what we like about Poundland, the 99p store and other similar businesses, and people do have massively different views, from the “not on my high street” supporters to those who welcome it with open arms in anticipation of bargains galore! Whatever your opinion, it’s an incredibly clever and yet simple business model and for those techies out there, it’s based on an accounting principle called “target pricing”. Target pricing is really simple in principle, work out what your customers are willing to pay for a product or service (or what price would really shake the market up and get customers to notice your business) and supply it at that rate – the challenge is; Being able to produce, source and supply it at that rate…..AND Still making a profit! In terms of Poundland, they’ve very clearly set out their marker – everything for £1.00, that’s it! But how did they manage to do it?* Well, once the target price is set at £1.00, they may decide that, as an average, on every product that they sell, they want to make 20p – on that basis they need to buy that product in for no more than 80p – and that means getting to work with suppliers.   Great relationships with suppliers is absolutely imperative and in the case of Poundland it’s no doubt enabled their business to function. For example it may be that we look at a box of cereal – in the major supermarkets the cost is £3.00 for 250g, how are Poundland going to sell this for £1 – simple; speak and negotiate with the suppliers and see how much of the 250g can we buy (for 80p) and sell (for £1) – in other words they’ve scaled down the sized of the products to fit the target price of £1 and that’s often why you see different sized products in Poundland as compared with the major high street supermarkets. We’ve applied the principle of target pricing to Poundland, but the same principle can be applied to any business, in any sector – solicitors, surveyors, builders, graphic designers, they can all achieve a target price – the big question is what will the consumer receive for that target price? They may have to; Do some of the work themselves Get a slightly lower quality product or service Wait slightly longer for the service Most business owners have already experienced this many times before – a customer asking “how much cheaper will it be if I do XYZ myself”? Sound familiar? There is no doubt about it, there is a large section of UK consumers and business owners that are driven by price, target pricing is one way to ensure that you hit the bullseye, if price is the area that you want to differentiate your business. Until next time…..FD Analytical ‘* VAT is ignore for the purposes of this example

Googles Predictions – What does google predictive search tell you about your industry?

Googles Predictions What does google predictive search tell you about your industry? OKAY, so 18 years after google was created, it’s probably a fair statement to say that most of us have now “googled ourselves” – if you haven’t, you should! But, very few of us have googled our industry or profession, the team at FD Analytical recently tried this and uncovered some interesting results using some of googles predictive search functions. Prior to typing “accountant” into google, we had (mistakenly) assumed that we would receive the standard results, such as; accounting, tax returns, auditing etc…..but what we actually found was somewhat of a surprise! What we did… We went to and simply typed in the phrase “my accountant has….” to uncover some of the top searches……and googles top 5 predictions? Take a look…. My accountant has…. …..has made a mistake …..has lost my books …..has been negligent …..has disappeared …..has died Not what you were expecting? No, not us either, what about, my accountant has……”done a fantastic job”……”helped my business to grow”…..”saved me a huge amount of tax”? Quite shocking actually, that google predictive text represents some of the most common search terms! Thankfully FD Analytical are not guilty of any of the above and we have no plans to disappear (or die for that matter!), so if you’re one of the 000’s of people across the UK who used one of these search terms, you may want to give us a call 0800 49 68 666 or visit us at Why not try and see what surprises Googles predictive search has for your occupation or profession and let us know by commenting these on our Facebook page or tweet these directly to us #FDAnalytical Until next time…..FD

BREXIT : what it could mean for YOU and YOUR business

What BREXIT could mean for YOU and YOUR business. Whatever your view on the recent “in, out” referendum, there is no denying that this is of huge significance to the UK, both politically and commercially. Within this article, we’re not going to talk about the “rights or wrongs” or present a “view” on the result, but offer strategies about potential, likely events and how best to prepare UK business for these. As I write, the pound sterling has just hit a 31 year low against the US dollar, David Cameron has resigned as Prime Minister (with effect from Oct 16) and no fewer than 14 Labour shadow cabinet MP’s have resigned. What’s the relevance to us? The implications around this aren’t neccesarily that we will miss the prime minister or that we even recognise the resigned labour MP’s names, but what it does, is create a huge amount of UNCERTAINTY…… …and one thing is for sure; people, consumers, markets and governments dislike UNCERTAINTY. This has huge effects on our behaviour as consumers or investors. Interest Rates Immediately following the announcement of the UK’s referendum, Mark Carney (governor of the Bank of England) issued a statement saying that they will take the necessary steps and measures to protect the UK economy, this may include adjusting interest rates. Whether interest rates will increase or decrease is unknown at this point, BUT, If changes in interest rates have a significant impact on your business you should now consider what the impact of a rate rise or fall is to you. For example, businesses who may be sensitive to increasing interest rates may be; Businesses with significant amounts of debt Businesses within the leisure and entertainment sectors* Home improvement business (builders, property developers) *the impact of interest rates on your customers, if the general public’s monthly mortgage payments increase as a result of higher interest rates, there is a pretty good chance that they will reduce their “general spending” potentially on items seen as “treats” or “leisure activities”   Exchange Rates As at 1:22 pm on the 27th June 2016, the £ is currently trading at an exchange rate of $1.3694 to the £1 – a 31 year low. If your business imports goods from the rest of the world, the vast majority of these are charged in (or at least “pegged against” the US Dollar), which in a nutshell, means that the cost of businesses buying goods, and bringing them into the UK to sell has just increased, overnight. “For example, a UK business purchasing $25,000 of stock (prior to the referendum) would have cost in the region of £16,667, the current cost of the same $25,000 of stock would be £18,256 – An increase of £1,589” The importing business then has a decision, does it put up prices to cover its increased costs at the risk of losing customers OR does it leaves prices as before and continue to sell goods but at a much lesser profit margin? On the basis that […]

Pricing your products or services – a different perspective?

Pricing – no pain, no gain! Pricing is one of the key challenges when starting and running a business – what price could you or should you charge for your product(s) or services?? Pricing policies help you to think about and determine what and who you are competing against – for example if your product or service is of the highest quality, why set your prices based upon your competitors? – You’re better than them, and surely this should justify a premium? Alternatively, if you’re operating in a market where the products you sell are “commodities” (i.e there is no discernible difference between your product and your competitors) then your competitive edge may well boil down to price. When considering and setting prices you could: –          Copy the prices of your nearest competitor (or under cut them slightly). –          Look to add a specific “mark up” to your products purchase cost. –          Target a specific profit margin on each product or group of products? Whatever decision you take, you can be sure that any decisions that you make around pricing will be absolutely fundamental to your business. Start too low and it may be difficult to raise your prices later, start too high and people may consider you too expensive.   When pricing, what are we trying to achieve?…… As much profit as possible? The highest price that the market and customers will bear? Just low enough that we are cheaper than competitors?……. ….Possibly, but ultimately, the question we are trying to answer is “what value do customers place on our products or services”? If we give customers value, they’ll purchase our goods right? Well, what about this as a thought…….why not compare the value of your goods or services to one of the bestselling products within the UK – and consider how many times better or worse your product is? The “Coffee Comparable?”     Or “Costa Index??” One of the most popular “products” on the market today is COFFEE, look around EVERYONE is drinking it! So why not compare the value of your products to a Coffee? Let’s take the typical value of the humble cappuccino at say, £2.50 OK, so I’m a restaurant looking to price my various courses, and considering pricing “starters” at £5.00 – using a “coffee comparable”, is a starter course, in a restaurant, worth twice the value of  a coffee – seem reasonable? Probably…..yes. OK, what about the “Mobile Measurement??” A typical mobile phone contract these days is what, £40.00 per month? Applying the same logic, if you’re a marketing consultant or an architect you would expect your monthly customer charges to exceed the value of a mobile contract surely, by two, maybe three times?? Ultimately pricing is about “value” what value does a customer get from purchasing YOUR product or service? Whilst we’re having some fun with this logic, it may just be an interesting thought to have around your products and services…… how much better (or how much additional value is perceived) than […]

Is your company REALLY dormant?

Is Your Company Dormant? A dormant company is essentially one that doesn’t trade and has no transactions. Companies House describes a dormant company as: “…if it has had no ‘significant accounting transactions’ during the accounting period. A ‘significant accounting transaction’ is one which the company should enter in its accounting records.” WARNING! Many “dormant companies” with bank accounts will often (even if not trading) incur transactions such as bank charges and companies house filing fees which may affect the dormant nature of your company or the ability to file dormant accounts with Companies House. Companies House states that allowable transactions when filing dormant company accounts are: Payment for shares taken by subscribers to the memorandum of association Fees paid to the Registrar of Companies for a change of company name, the re-registration of a company and filing annual returns; and Payment of a civil penalty for late filing of accounts. HMRC refers to a dormant company as: “… a company that’s not active, not liable for Corporation Tax or not within the charge to Corporation Tax.” and gives examples of acceptable dormant companies as follows; A new company that hasn’t begun trading yet An existing company that has traded in the past, but is not currently trading A company that will never trade because it has been formed solely to hold an asset such as property. Time Limits? There is currently no time limit on how long a limited company can currently remain as “dormant”. Managing your dormant company Dormant companies are relatively easy to administer – statutory filing requirements are as follows: A set of dormant financial statements be filed with Companies House on an annual basis A companies house annual return to be filed each year A CT600 corporation tax return to be filed with HMRC (although if you contact HMRC in writing explaining that the company IS dormant, they will often waive the requirement of a corporation tax return until trading begins). WARNING! Even though the company is not trading, late returns and filings will incur the same fees, penalties and repercussions as a “live” trading company. Accountancy fees for managing a dormant company are relatively minor, for example, FD Analytical currently charges an annual fee of £85.00 to maintain and protect your limited company. Why Create a Limited Company…..if it is dormant? There are a number of answers to this, and the answer typically falls into one of three categories: Company name protection: if you form your limited company with the name “XYZ Limited” this name is protected – nobody else can obtain this name OR trade as “XYZ Limited”. This may be particularly useful if you trade as a sole trader and don’t want a competitor to take a similar (or the same name) and capitalise on your brand and goodwill. Intention to trade: many entrepreneurs will have an idea for a new product, design or business and wish to “start the process” of creating this entity, the company formation is clearly the first step […]